Need help

A & B – Capital Structure

Two companies A Co., and B Co., are in the same business with same level of risk.

A is an all-equity company with annual net cash eanings of $800 thousands at which level they are expected to remain unchanged for the foreseeable future. The company has issued 6.25 million shares of par value $0.05. Its current market capitalization is $5 million.

B s net earnings before interest is $500 thousands and expected not to change in the near future. The company has issued 5 million shares of par value $0.25 and $1 million 5% irredeemable debentures. The market capitalization of the equity is $2.5 million and the market value of the debentures is 80%. Assume both companies distribute all the earnings as dividend and interest.

Ignore tax and transaction cost.

Required:

(a)

Estimate the cost of capital of A Co., and B Co.

(b)

Suppose Peter, a shareholder of B Co. holding $3,000 worth of the shares of B Co., believes the market value of B is overpriced, what would he do to improve his financial position?

(c)

If quite a number of shareholders of B Co. did what Peter did, what would happen to the market value of share B What is the equilibrium value of share B?

(d)

What are the assumptions made in the above estimation?

 

Looking for a Similar Assignment? Hire our Top Techical Tutors while you enjoy your free time! All papers are written from scratch and are 100% Original. Try us today! Active Discount Code FREE15